Green Rush: New Jersey businesses prepare to cash in on cannabis

Last week's election means New Jersey will replace longtime opponent to cannabis legalization, Gov. Chris Christie, with a governor-elect, Phil Murphy, who has signaled his intention to legalize marijuana for recreational use.

If legalized, New Jersey would be the only state in the New York metropolitan area and one of two states on the east coast with a legal cannabis industry. The other is Massachusetts.

Proponents of legalization are bullish about the industry’s profitability. Experts have predicted that roughly 10 percent of the population would have an interest in purchasing medical and recreational cannabis. In Colorado, where marijuana has been legal since 2016, has reported more than $1 billion in revenue less than 12 months after legalization. With nearly twice the population and closer access to metropolitan cities, New Jersey could see even higher profits.

However, the business of cannabis has significant roadblocks. Regulations are non-existent and the illegality on the federal level leaves banks and businesses open to prosecutions for drug trafficking or money laundering.

The mix of profitability and instability has left the business of cannabis dominated by individuals who aren’t deterred by the risk, but creating an environment that resembles the Wild West.

“There are a lot of potholes to get [to legalization],” said Daniel Barkin, a partner with Mandelbaum Salsbug based in Roseland. Barkin represents financial services and corporate clients in financing, commercial and corporate transactions. He also represents investors interested in the cannabis business.

Currently the industry is almost entirely funded by private individuals who have the capital to launch their own investments. The cannabis business, Barkin said, is not “for the faint of heart.”

His clients are required to do a significant amount of research to avoid violating the law, but that level of dedication is rare for the industry. “Everyone else is absolutely sketchy. That’s one of the problems,” said Barkin “The lawyers are not top-flight lawyers; no top financial advisors are going near it, and their company won’t let them do it.”

Most banks in the United States are federally insured through the Federal Deposit Insurance Corporation (FDIC) and as such, are subject to federal laws and regulations. Marijuana is still considered a schedule I drug by the federal government, and flipping the switch on legality on the state level does not change that.

The federal Bank Secrecy Act of 1970 requires banks to report suspicious activity that could relate to money laundering, such as flagging a client whose main business is selling cannabis products. This expectation does not change if the state legalizes the business of recreational marijuana, explained Barkin.

The result is that no major bank in the U.S. will touch any funds related to marijuana, said several sources. Cannabis businesses are denied bank loans and investments and barred from opening accounts, forcing them to handle their revenue in cash.

The Trump Administration has not been sympathetic to these issues, whereas the prior administration signaled leniency for laws relating to marijuana specifically.

Under the Obama Administration, the Department of Justice distributed what is now known as the “Cole Memo.” Penned by Deputy Attorney General James Cole, the memo indicated that prosecuting state-legalized marijuana businesses was not a priority for the department. Although banks were still required to send suspicious action reports to the federal government, they could mark these filings as limited, priority or termination to indicate the severity of the filing. This practice was outlined by the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

The current Attorney General, Jeff Sessions, has indicated his opposition to the legalization movement.

Support for marijuana legalization has steadily increased in the past decade. Some businesses based in New Jersey have established a business model intending to enter the market as soon as legality concerns are addressed.

“It’s pretty much the next phase of agriculture,” said Ken VandeVrede, chief operating officer of Terra Tech and president of Edible Garden Farms, based in Belvidere.

Edible Garden Farms has been around for more than a decade, specializing in growing organic fruits and vegetables. But in 2013 the company began the process of expanding to cannabis cultivation, extraction and dispensing through Terra Tech. Because of the legal issues in New Jersey, the company does business outside the state.

“Since California and Nevada were the most friendly, that’s why we ended up there first,” VanVrede said. “We wanted to be in New Jersey originally.”

Though Terra Tech has operated in other states, having an established business won’t help it transition into New Jersey more quickly. Whereas a traditional business can headquarter its manufacturing in one state and move its products around the country, marijuana’s illegal status makes that impossible. “What we have to do, which is crazy, is we have to build the same infrastructure in every state,” stated VanVrede.

New Jersey’s medical marijuana system has its own structural issues. Under the state’s program, every medical marijuana business has to receive a permit for all parts the business: Cultivation, dispensary and transportation. Only recently has the state issued permits separately, explained VanVrede.

Terra Tech is attempting to follow the rules as best as it can, but it is not immune to concerns about banking and insurance. “They’re all trying to figure out ways to be creative,” said Barkin. He emphasized that his clients are not involved in any illegal conduct, but lawyers are left out of the conversations about how to circumvent federal restrictions.

Multiple banks here in New Jersey and around the country have been named as “cannabis-friendly,” by experts in the industry but these banks refuse to comment on the topic or acknowledge their business with cannabis companies.

The federal restrictions have scared most established businesses away from considering marijuana, but the tide could be changing.

One of Barkin’s clients attended a chamber of commerce meeting in Boston two years ago and found that everyone in attendance was a guy with a ponytail. That same client went back to Boston’s chamber of commerce in October and spoke to a crowd of business people dressed in suits.

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Arthur Augustyn

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Arthur Augustyn grew up in Massachusetts and previously covered the video game industry in Los Angeles, city politics in Malibu, California, and local news in Bergen County before working at NJBIZ. He currently covers cannabis, government and tech.

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